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Philip Morris-Altria Agreement Provides Competitive Edge

Philip Morris USA Inc. recently announced the establishment of a strategic framework with Altria Group Inc. to commercialize reduced-risk tobacco products and electronic cigarettes. Under the terms of this agreement, Altria will make its e-cigarette products exclusively available to Philip Morris for commercialization outside the United States and Philip Morris will make available two of its “candidate” reduced-risk products exclusively available to Altria for commercialization in the U.S., with the intent that someday these products may be regulated as Modified Risk Tobacco Products by the Food and Drug Administration.

This agreement could have a significant positive financial impact, particularly for Altria, since Altria’s licensing arrangement with Philip Morris allows Altria to participate in the global e-cigarette category, which we continue to anticipate will generate substantial growth and profits. The agreement also provides for cooperation on studying the science behind reduced-risk products and engaging with regulators both in the U.S. and internationally.

We have long believed that Philip Morris and Altria, by virtue of their shared history and technology, would partner on reduced-risk products. We believe formalizing this relationship should help accelerate both companies’ reduced-risk businesses and ultimately help catapult growth of the reduced-risk/e-cigarette category globally.

In our view, the opportunity is huge considering that Philip Morris previously stated that its “Platform 1” could generate additional profits of $720 million to $1.2 billion over time. As Philip Morris launches Altria’s e-cigarette technology (its new, enhanced MarkTen technology) internationally, Altria would receive a mark-up on contract manufacturing and royalties. Although Philip Morris will be licensing the MarkTen technology internationally, it may use the MarkTen brand name and/or it could choose to brand this technology as something else, including an existing brand such as Marlboro.

Importantly, Altria plans to leverage Philip Morris’ extensive international sales force, which should further accelerate global distribution of its e-cigarette technology and set the stage for Philip Morris/Altria to establish global market leadership in reduced-risk tobacco products.

We continue to believe consumption of e-cigarettes could surpass consumption of traditional cigarettes in the next decade in the U.S. Also, given the vast size of the global cigarette market, the long-term upside potential for reduced-risk products is excellent. Overall, we believe the market continues to underestimate the growth opportunities for the tobacco industry.

In addition, we don’t believe the recently enacted indoor vaping bans in New York City and Chicago will have a major impact on our long-term e-cigarette forecast. The recently approved legislation bans e-cigarettes from indoor public spaces, similar to combustible cigarettes. We believe this is somewhat of a knee-jerk reaction and doesn’t give e-cigarettes the benefit of the doubt we think they deserve. We believe that as the health benefits and reduced-risk proposition of e-cigarettes continue to be better understood and widely accepted, citywide bans should slow or even reverse.

Editor’s note: This column is excerpted with permission from Bonnie Herzog’s June 12 research report. The opinions expressed are the author’s and do not necessarily reflect the views of Convenience Store News.

By Bonnie Herzog, Wells Fargo Securities LLC

About Bonnie HerzogWells Fargo Securities LLCBonnie Herzog is managing director and senior beverage, tobacco and convenience store analyst for Wells Fargo Securities LLC. During her 14 years as a sell-side equity research analyst, Herzog has been a top-rated institutional investor analyst.